Friday May 9, 05:50 PM
Make the most of tax-free allowances
By Steve Lodge
As comfortably-off pensioners, we have done well out of this year's income tax changes - including the "scrapping" of the 10 per cent rate. I am 75 and my wife is 70. As I understand it, I benefit from a higher age-related personal allowance
of £9,180 for 2008/9, while her tax-free allowance is £9,030. My income of about £18,000 a year is mostly occupational and state pensions. My wife's income is about £11,000 - mainly interest from £175,000 of taxable cash savings, and the rest is state pension. As well as the higher personal allowance, she benefits from the 10 per cent rate for her savings, while I receive the Married Couple's Allowance, which I believe also reduces my tax rate to 10 per cent on about £6,000 of income above the personal allowance. This leaves only a relatively small amount of income taxable at the new lower basic rate of 20 per cent. Is there anything we can do to make our income more tax-efficient? We always take out Isas, but have also been mulling gifting some of my wife's savings to our grown-up children. At the moment she has 20 per cent savings tax deducted at source because her income is over the personal allowance, even though her overall tax bill is now just £200. This means waiting a year to recover about £1,500 of overpaid tax. By giving away about £40,000 of her savings, she could then sign up to receive her interest gross and so receive the same "in hand" interest. Richard Mannion, national tax director at Smith & Williamson wealth managers, says the calculations are correct. Your wife is likely to be due a tax repayment year-on-year because of the increased personal age allowance and the 10 per cent tax rate for savings income, while the bank will withhold 20 per cent income tax on the interest. It is possible to complete a form R85 (available from HM Revenue & Customs at www.hmrc.gov.uk) to register for interest on a savings account to be paid gross, but only when total taxable income is below the person's tax-free allowance. As your wife's income is above the allowance of £9,030, it would not be possible to complete the R85. You suggest reducing your wife's taxable income to bring it below the allowance and then completing an R85. There are various methods to achieve this: ●A gift of capital from your wife to yourself. This would reduce your wife's taxable income, but the income would then be taxed at the 20 per cent rate in your hands, resulting in higher overall tax on the savings. ●A gift of capital from your wife to your children would reduce her taxable income, but she would not benefit from the capital. There may also be inheritance tax consequences should she die within seven years.●Investing in stocks and shares Isas where the investment limit is £7,200 rather than the £3,600 limit for cash Isas. ●Capital could be invested via National Savings & Investments (NS&I), which offers tax-free investment opportunities, including premium bonds and savings certificates. ●Interest on capital in offshore accounts can often be paid gross. Most banks will offer this facility. Although this would not reduce the tax liability, it would mean that your wife would pay tax annually (via a self-assessment tax return), rather than having to reclaim the overpayment. This would give a cashflow advantage, but with the disadvantage of joining the self-assessment system. I own two properties in London and Basingstoke. Both were inherited after family members died and are now rented out, while I live with my partner in a housing association flat which is in her name. The London property is worth about £550,000, the Basingstoke one half that. We don't plan to sell either soon, but we are aware that there are capital gains tax implications when we do. How can we minimise the this bill? Christopher Groves, partner at solicitors Withers, says that when a property is inherited, the acquisition cost of that property is the market value at the date of death. You need only be concerned about the increase in value of the properties from the date of death of the family members. From this you can deduct any expenditure on improving the properties, and this will give you the total chargeable gain. You will also be able to deduct your annual capital gains exemption (£9,600 in 2008/9), assuming you had no other chargeable gains in the year of sale. If you are married or in a civil partnership, you could put the properties into joint names to secure two annual exemptions on sale. But the potential impact on your eligibility for the housing association property should be considered. It is no longer necessary to consider the length of ownership in calculating the rate of CGT applicable on sale - the gain will be taxed at 18 per cent regardless of the period of ownership. You may be aware of principal private residence relief (PPR (Paris: FR0000121485 - news) ) which exempts all or part of a gain arising on the sale a property from CGT if it has been a person's main residence. Where you have only occupied the property for part of your ownership period, you get a proportionate reduction in the gain, but this will always include the last three years of ownership. By occupying one of the properties as a second home, for even a relatively short period, you could claim at least three years of exemption. However, this could reduce the exemption available on your partner's property when she sells it as a married couple may only have one main residence between them at any one time. I am in my mid-40s and am not married to my partner and, in the event of my death, I am concerned about inheritance tax on a potential estate of £2m. I heard that one way of avoiding IHT is to have life insurance policies, workplace death-in-service benefits, and other pensions written in trust so that the proceeds are paid to beneficiaries outside of my estate. I'm also told it speeds up payout, as there is no need to wait for probate. How do I know the status of existing policies and how can I put them in trust if they aren't? Lee Smythe, director of financial planning at Killik & Co wealth managers, agrees it is important to ensure that life insurance policies are held in an appropriate trust as otherwise the payment at death is just added to the value of your estate for the purposes of calculating IHT. Luckily, most pension plans and death-in-service schemes are automatically held in trust and you just need to nominate a beneficiary so that the trustees are aware of your wishes. These benefits would be paid without the need for probate being granted as they would not form part of the taxable estate for IHT. You should make sure that you have nominated a beneficiary for your death-in-service benefits. Your human resources department should be able to tell you about this and provide the appropriate form. For the other pension plans, you should contact the providers to check the plans are in trust and to request a beneficiary nomination form. The with-profits bonds could be written in trust to avoid IHT, but this might preclude you from being able to withdraw the money for your own benefit. You should take professional advice on how to mitigate your IHT liability with regard to your pensions and benefits. The advice in this column is specific to the facts surrounding the questions posed. Neither the FT nor the contributors accept any liability for any direct or indirect loss arising from reliance placed on replies.
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